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Big US companies face big losses on commercial investments but will plug gap, it is claimed

Life insurance companies face the biggest problems with the giants of the industry facing $22.6 billion losses, it is claimed in a report by Fitch ratings.

It points out that until now the losses have been ‘virtually nil’ but will become as major issue in 2010and 2011.

‘It will put some stress on the capital positions as they realize the losses,’ said Fitch Senior Director Andrew Davidson.

Life insurers held more than $450 billion in commercial loans and mortgage-backed securities at the end of 2008, Fitch said in a related report.

The delinquency rate on US CMBS rose to 4.01% at the end of October, almost seven times what it was a year ago, Moody’s Investors Service said yesterday.
US life insurers, a group led by MetLife and Prudential Financial, are in the worst position, according to Fitch.

Met Life has recorded three straight quarterly losses and Hartford Financial Services Group has lost money since June 2008 as investments that include those backed by commercial and residential mortgages dropped in value.

MetLife and Prudential have admitted that commercial mortgage defaults will climb in the next year.

‘Losses in our commercial mortgage portfolio are going to accelerate over the next 18 months.

The fact that there have been very little in the way of delinquencies so far should not be taken as an indication that there won’t be losses,’ Bernard Winograd, executive vice president of Prudential, said recently.

 ‘The worst is to come.

Typically there’s a lag between when the economy softens and when the defaults actually occur,’ MetLife’s Chief Investment Officer Steve Kandarian said in an interview with Bloomberg Television.

The credit crisis has driven $138 billion worth of US commercial properties into default, foreclosure or debt restructuring, according to Real Capital Analytics.

Commercial real estate prices have plunged almost 41% since October 2007, the Moody’s/REAL Commercial Property Price Indices show.
Fitch believes that the companies will, however, be able to plug the gaps.

‘They’ve got plenty of capital and they continue to have operating earnings, so in that regard we think the losses will be manageable.

They’ll be able to fill the holes that develop,’ said Davidson.